icds - aims & associatesaimsassociates.co.in/uploaded/files/icds-29.06.2017_final.pdf · icds...

ICDS – ABOUT

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Section 145(2) was amended with effect from AY 2015-16 by replacing word of Accounting Standard with ICDS

ICDS is applicable for income chargeable under the head

Income from business Profession – Section 28

Income from Other Sources – Section 56

10 ICDS have been notified vide notification 87/2016 dated 29th September, 2016

ICSD is applicable from the AY 2017-18

ICDS are applicable to all the assessee following mercantile system of accounting except Individual and HUF who does not fall under section 44AB

ICDS – ABOUT

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Q.3 of CBDT Circular No. 10 of 2017 dated 23rd March 2017 Question 3: Does ICDS apply to non-corporate taxpayers who are not required to maintain books of account and/or those who are covered by presumptive scheme of taxation like sections 44AD, 44AE, 44ADA, 44B, 44BB, 44BBA, etc. of the Act?

Answer: ICDS is applicable to specified persons having income chargeable under the head `Profits & gains of business or profession’ or `Income from other sources’. Therefore, the relevant provisions of ICDS shall also apply to persons computing income under the relevant presumptive taxation scheme. E.g., for computing presumptive income of a partnership firm u/s 44AD of the Act, the provisions of ICDS on Construction Contract or Revenue recognition shall apply for determining receipts or turnover, as the case may be.

Individual/HUF falling under presumptive tax not subject to audit u/s 44AB – out of ICDS by virtue of notification

If opting out of Section 44AD, S. 44AB applicable – ICDS applicable Does ICDS III / ICDS IV apply to compute gross receipts and turnover for

purpose of determining eligibility under presumptive tax scheme? Whether possible to apply ICDS for determining whether ICDS applicable?

Circular reference for individuals/HUFs Partnership firms, AOP, BOI under presumptive tax scheme - ICDS may apply

for determination of turnover/receipts

ICDS – ABOUT

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Not applicable for maintenance of books of accounts

Parallel books of accounts / final accounts necessary to keep track of adjustments.

Form 3CD amended to disclose the adjustments required to be made to profit or loss under ICDS

ITR Forms 3, 5 & 6 amended to make adjustment in the taxable income

ICDS – ABOUT

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Obligations of Tax Auditor

Certifying correctness of particulars in Form 3CD – including adjustments required by ICDS

Onerous responsibility

Needs to understand accounting standards being followed, tax law and ICDS provisions

Identify differences in AS and ICDS/tax law ICDS wise

Pay particular attention to changes in accounts on account of changes in AS/adoption of Ind AS

Ensure that tax aspects of each difference is properly considered

Insist on parallel final accounts under ICDS/tax laws to ensure that all effects of adjustments properly captured and given full effect to

INCOME COMPUTATION DISCLOSURE STANDARD

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I – Accounting Policies II – Valuation of Inventories

III – Construction Contracts IV – Revenue Recognition

V – Tangible Fixed Assets

VI – Effects of Changes in Foreign Exchange Rates

VII – Government Grants

VIII - Securities XI – Borrowing Costs

X – Provisions, Contingent Liability and Contingent Assets

ICDS – ABOUT

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ICDS expected in the future for

Revenue Recognition by Real Estate Developers (draft of Real Estate

Transactions put up for public comment on 11th May 2017)

Leases

Intangible Assets

Share based Payment

Service Concession Arrangements

Exploration for and Evaluation Of Mineral Resources

ICDS – I ACCOUNTING POLICIES

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ICDS – I : ACCOUNTING POLICIES

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Deals with significant accounting policies applied while computing income under the head “Profits and gains of business or profession” or “Income from other sources”.

Does not deal with maintenance of books of account.

ICDS - concerned with application of accounting policies and assumptions while computing income for the purposes of income-tax.

Fundamental accounting assumptions

o Going Concern

o Consistency

o Accrual

Prudence and materiality are not stated as fundamental accounting assumptions


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Expected Losses or Mark to Market Losses shall not be recognized unless permitted by other ICDS.

Substance over form principal

Passing of risk and reward over transfer of legal title

Finance lease is to be treated as loan and assets by leasee

Recognizing revenue only when the risk and reward is transferred

Policies should not be changed unless a reasonable cause.

Disclosure Requirements

Significant Accounting policies adopted by the concern

Note if fundamental accounting assumptions are not followed

Any change in accounting policy have material impact


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Other Accounting Policies

Methods of depreciation, depletion and amortisation

Treatment of expenditure during construction

Conversion or translation of foreign currency items

Valuation of inventories

Treatment of goodwill

Valuation of investments

Treatment of retirement benefits

Recognition of profit on long-term contracts

Valuation of fixed assets

Treatment of contingent liabilities.

ICDS – II VALUATION OF INVENTORY

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ICDS – II : VALUATION OF INVENTORIES

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Scope:

ICDS – II shall be applied for valuation of inventories, except:

o Inventories covered by other ICDS ( Construction Contracts, Securities)

o Inventories of livestock, agriculture and forest products, mineral oils, ores and gases (valued at NRV)

o Machineries spares use in tangible fixed assets and not regular in use (Tangible Fixed Assets)

Inventories are Assets:

Held for sale in ordinary course of business

In the process of production of such sale

In the form of material to be consumed in production process

Inventory could be land held for trading purpose, software etc.

ICDS – II : VALUATION OF INVENTORIES

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Cost of inventories:

Cost of purchase, cost of service, cost of conversion and other cost incurred in bringing the inventories to their present location.

o Cost of material purchased with taxes and duties

o Cost of service includes transpiration cost, labour and other services

o Cost of conversion includes direct cost, fixed & variable cost allocated to each unit

o Other Cost incurred like packing and finishing, interest only if allowed under ICDS on borrowing cost.

Inventories are to be valued at :

Specific Identification cost (not ordinarily interchangeable, produced for specific purpose)

First in First Out Method (FIFO), or

Weighted Average Method

Retail costing for the retail goods ( Selling price – Average Margin )

Each item is to be valued separately

ICDS – III CONSTRUCTION CONTRACTS

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ICDS – III : CONSTRUCTION CONTRACTS

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Scope:

ICDS – III shall be applied in determination of income from construction contract of a contractor :

o Contract for construction of an asset or group of assets

o Contract for rendering of services which is directly related to construction of an asset (Project manager, architect)

o Contract for destruction or restoration of asset

Contract value includes:

Initial agreed value

Retention revenue

Claims and incentives payments

Netting allowed for other incidental income except interest, dividend and capital gain


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Contract revenue recognition:

Recognize revenue as per stage of completion of the project (“If it is possible to realize” is removed)

If in early stage outcome of the contract is not certain, do not recognize (should not extend beyond 25%)

If the revenue is not recoverable which is recognized earlier, reversal of such income shall not be allowed unless it is written of from books of accounts – section 36(1)(vii)

Cost not recoverable may be allowed under the provisions of the Income-tax Act

Expected losses from the contract shall be recognized in proportion to percentage of completion. Future or anticipated losses shall not allowed unless actually incurred ( Contrary to AS7)


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Contract revenue already recognized as income and subsequently written of in books shall be recognized as expenses and not an adjustment from contract revenue.

When contract covers number of assets, each asset is to be treated as separate contract if:

Separate proposal has been submitted for each asset;

Each assets was separately negotiated and both parties can accept or reject contract relating to each asset; AND

Cost and revenue of each asset can e identified independently.


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Group of contacts, whether with single customer or with several should be treated single construction contract when

The group of contract is negotiated as a single package;

The contracts are so closely interrelated hat they are in effect, part of a single project with an overall profit margin; AND

The contracts are performed concurrently or in a continuous sequence

Construction of additional asset or amended at the option of the customer shall be treated as separate contract when:

The asset defer significantly in design, technology or function from the original asset; OR

The price of the asset is negotiated without having regards to original price


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Contract cost includes :

Cost that relate directly to the specific contract;

Cost that are attributable to the contract (engineer, managers, administrative etc.);

Such other cost specifically chargeable to customer AND

Allocated borrowing cost as per ICDS

Determination of stage of completion :

The proportion that contract cost incurred to the total estimated cost; OR

Survey of work performed: OR

Completion of physical proportion of the contract work

ICDS – IV REVENUE RECOGNITION

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ICDS – IV : REVENUE RECOGNITION

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Scope:

ICDS – IV - shall apply for determination of revenue arising in the

course of normal activities of a person from :

o The sale of goods

o The rendering of services

o The use by others of a person’s resources yielding interest, royalties or

dividend


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Revenue from sale of goods:

When ownership in goods is transferred

When risk and rewards are transferred

Revenue is to be recognized when collection of amount is reasonably certain

If reasonable certainty is lacking, postpone to the extent of uncertainty involved

Revenue from rendering of services:

To be recognized on percentage completion method resulting into marching with cost incurred till stage of completion

In case of contract period of less than 90 days, revenue is to be recognized when contract is completed or substantially completed (Completed Contract Method)

In case of contract period of more than 90 days, percentage completion method


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Recognition of dividend:

As per the provision of Income tax Act

Recognition of royalty:

Accrue in accordance with the terms of relevant agreement unless having regards to the substance of the transaction, it is more appropriate to recognize on some other basis

Recognition of interest:

Shall accrue on time basis applying rate to the amount

Interest on refund of tax, duty or cess to be recognized in the year of receipt.

Postponement of revenue:

Even due to lack of reasonable uncertainty of collection exist, revenue can be postponed only to claim price escalation and export incentives.

Barter Transaction:

No specific condition

ICDS – V TANGIBLE FIXED ASSETS

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ICDS – V : TANGIBLE FIXED ASSETS

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Scope:

ICDS – V applies to all Tangible Fixed Assets

It exclude Intangible Fixed Assets

Tangible Fixed Assets are Assets:

Being land, building, machinery, plant or furniture

Held with intention of being used in normal course of business

Not held for sale, like Inventories (ICDS-II : Valuation of Inventories)

Used for purpose of producing or providing goods or services

Tangible Fixed Assets exclude Tangible Fixed Assets kept for disposal, Copyrights, Trademarks etc.

Machinery spares used in regular operations are charged to revenue.

Machinery spares which are expected to irregularly used or a stand-by equipments are to be capitalized.

ICDS – V : TANGIBLE FIXED ASSETS

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Cost Components for Capitalization:

Actual cost include purchase price, import duties, non recoverable taxes and other directly attributable expenditure

Trade discount and rebates shall be deducted.

Start-up and commissioning expenses including test run and experimental production are required to be capitalized.

Administration & other overheads which do not relate to specific Tangible Fixed Asset is excluded from the Actual cost of asset.

In case of Self-Constructed Tangible Fixed Assets same principles shall be applied and internal profits shall be excluded.

Capitalization - Expenditure to be added to Actual cost of an existing Tangible Fixed Asset

o Increases future benefits beyond previously assessed standard performance

o Cost of addition/extension which is Capital in nature and becomes integral part

Non-Monetary Consideration:

In case of Exchange – Fair Market Value of Tangible Fixed Asset acquired

Fair Market Value – Arm’s Length Transaction between knowledgeable, willing parties

ICDS – VI GOVERNMENT GRANTS

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ICDS – VII : GOVERNMENT GRANTS

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Scope:

ICDS – IV – deals with government grants in the nature of subsidies, cash incentives, duty drawback, waiver, concession etc.

The ICDS does not deal with

o Government assistance other than in the form of grant

o Government participation in the ownership of enterprise

Recognition of grnats:

Grant shall only be recognized when there is reasonable assurance that

o All the conditions shall be complied; and

o The grant shall be received

ICDS – VII : GOVERNMENT GRANTS

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Treatment of grants :

If grant relates to a depreciable fixed asset or asset of a person shall be reduced from cost of the assets or block of the assets.

If grant is in the nature of promoter’s contribution can not be directly related to any asset, shall be deducted from all the assets in proportion or shall be reduced from block of assets.

If the grant relates to non-depreciable assets requiring fulfillment of certain obligations, it shall be recognised as income over the period in which cost meeting such obligation is incurred

If grant relates to compensation for expenses or losses incurred, shall be recognised as income of the period in which it is receivable.

Other grants shall be recognised as revenue over the period matching with the related cost intended to compensate.

ICDS – IX BORROWING COSTS

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ICDS – XI : BORROWING COSTS

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Scope:

Borrowing costs are interest and other cost incurred in connection with the borrowing of funds and include:

o Commitment charges

o Amortized amount of discounts / premiums relating to borrowings

o Amortized amount of ancillary cost in connection with arrangement

o Financial charges under financial lease and similar arrangements

It exclude actual or imputed cost of owner’s equity and preference share capital.

Qualifying Assets:

Tangible Fixed Assets - Land, building, machinery, plant or furniture

Intangible Fixed Assets – Know-how, Copyrights, Trademarks, franchises etc.

Inventories - Inventories that require a period of 12 months or more to bring them to a saleable condition.


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Capitalization Principles :

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalized as part of the cost of that asset.

Capitalization

o out of specific loans and

o out of general loans

Period for capitalization

Income on temporary investment of borrowed fund shall be taxed as other income and shall not be allowed to net off.

Type of Loan Start Period End Period

Specific Loans At time of borrowing Inventory – Completion of substantially all the activities necessary to prepare such inventory for it’s intended sale Fixed Asset – First put to use

General Loans At time of utilization


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Borrowing Costs for Capitalization:

Specific Loans – Actual interest incurred during the period

General Loans – Amount of Interest = ( A x B) / C

A = Actual Interest incurred during the period on General Loans

B =

Qualifying asset appearing on first and last day of balance sheet

Average Cost of Qualifying Asset as appearing in balance sheet

Qualifying asset does not appear on first day of balance sheet

Half of Cost of Qualifying Asset

Qualifying asset does not appear on last day of balance sheet

Average Cost of Qualifying Asset as appearing of first day and date of put use or completion

C = Average of Total Assets as per last and previous year balance sheet. Total Assets excludes assets which are directly funded out of Specific Loans

ICDS – X PROVISIONS, CONTINGENT LIABILITIES AND

CONTINGENT ASSETS

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ICDS – X : PROVISIONS, CONTINGENT LIABILITIES AND

CONTINGENT ASSET

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Scope:

ICDS – X covers following:

o Provisions – recognized when

Present obligation as a result of Past Events

Reasonably Certain that an outflow of resources embodying Economic Benefits will be required to be settle the obligation (As per AS 29 word is “Probable”)

Reliable Estimate can be made of amount of the obligation

o Contingent Liability –

Possible obligation arises from past events and existence of which will be confirmed ONLY by occurrence or non-occurrence of one or more Uncertain Events, Not wholly within the control

Present Obligation arises from Past Events but is not recognized because:

• Not Reasonably Certain that an outflow of resources embodying Economic Benefits will be required to be settle the obligation

• Reliable Estimate can not be made of amount of obligation

o Contingent Asset –

Possible Asset arises from past events and existence of which will be confirmed ONLY by occurrence or non-occurrence of one or more Uncertain Events, Not wholly within the control

ICDS – X : PROVISIONS, CONTINGENT LIABILITY AND

CONTINGENT ASSET

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Scope:

ICDS – X does not deal with provisions, contingent liabilities and contingent assets:

o Resulting from financial instruments

o Resulting from Executory Contracts

o Arising in Insurance Business from Contracts with Policyholders

o Covers by other ICDS

Review:

Provisions are to be reviewed at end of each year and adjusted to reflect best estimate.

If provisions are no longer reasonably certain then should be reversed.

Contingent Asset are to be review at end of each year and adjusted to reflect best estimate.

If Contingent Asset are no longer reasonably certain then asset and related income should be reversed.


CONTINGENT ASSET

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Understanding of Important words

Examples Present Obligation Reasonably Certain Reliable Estimate

Warranty for manufacturing defects given by supplier of machinery

Replacement of machinery within 12 months in case of defects

Past experience shows with reasonable certainty that there would be few claims for defects

Provisions to be recognized based on best estimates worked on scientific basis

Agreement indicates that temporary erections, structures etc.…for 100 workers on site to be removed after completion of contract to setup a colony

Clearing of site on completion which is arising from past event that is signing of construction contract

Reasonably certain that without incurring the cost for arrangement of 100 workers can not be made on site and the construction work cannot be completed

The estimated cost of making arrangement of 100 workers, shall be added to the cost of the project and will be claimed as expenditure on percentage completion basis.


CONTINGENT ASSET

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Understanding of Important words

Examples Present Obligation Reasonably Certain Reliable Estimate

Guarantee given for financial performance (repayment of loan) of an associate

Guarantor on account of signing of guarantee documents

On failure to repay loan, followed by declaration of insolvency, there source outflow is reasonably certain. Until closure of loan it is Contingent liability.

Best estimate of the short fall in settling the unpaid balance considering the recovery from the Associate.

Court case claiming damages for defects in construction which is strongly disputed by the contractor defending it is on account of defective design.

Claim for damages on account of undertaking of construction contract

Based on the advise of the Advocate, the defense is very strong. Thus there is no reasonable certainty that a claim would arise under the contract.

No provision can be recognized till the court orders the claim against the contractor. Till that time, it will appear as contingent liability.

ICDS – DISCLOSURE IN ITR & TAX AUDIT REPORT

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Amendment to Return Forms – 3,5,6


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Only net effect under each ICDS required to be disclosed

Amendment to Form 3CD – Clause 13

(d) Whether any adjustment is required to be made to the profits or loss for complying with the provisions of income computation and disclosure standards notified under section 145(2)?

(e) If answer to (d) above is in the affirmative, give details of such adjustments:

(f) disclosure as per ICDS

o ICDS I – Accounting Policies

o ICDS II – Valuation of Inventories

o ICDS III – Construction Contracts

o ICDS IV – Revenue Recognition

o ICDS V - Tangible fixed Assets

o ICDS VII - Government Grants

o ICDS IX - Borrowing Cost

o ICDS X – Provisions, Contingent Liabilities and Contingent Assets


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Questions?

609/A, Atlantis Heights, Sarabhai Main Road, Near Genda Circle, Vadodara. 390 023 91 265 2329099 | 91 9099977868 [email protected] www.aimsassociates.co.in

29 June, 2017

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CA Abbas Gulamhusainwala

mailto:[email protected]

http://www.aimsassociates.co.in/

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